UK and Europe heading for rift over regulation

The European Commission has been accused of launching a "blatant attack"
on London's financial services industry with proposals to regulate hedge
funds and private equity firms.

By Louise Armitstead

5:49AM BST 30 Apr 2009

The European Commission has been accused of launching a "blatant attack" on London's financial services industry with proposals to regulate hedge funds and private equity firms.

The directive looks set to open a deep divide between the UK – where over 80pc of the alternative investment industry is based – and the rest of Europe.

The proposals include radical new rules ranging from fund raising to capital requirements.

The directive is particularly tough on non-European fund operators. It stipulates that only funds domiciled in Europe can be marketed in the EU. An estimated 90pc of hedge funds are domiciled off-shore while the industry is also dominated by Amercian players.

Antonio Borges, chairman of the Hedge Fund Standards Board, said: "This is a blatant attack on the UK and US financial systems by continental countries that neither have a tradition of alternative investments nor a proper understanding of them. With the European elections coming up this is clearly politicial."

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Steven Whittaker, partner at Simmons & Simmons said: "This is a deeply protectionist directive and damaging for the UK which attracts the international players."

But in Europe the directive was criticised for not going far enough. Poul Nyrup Rasmussen, a Danish MEP and president of the Party of European Socialists who led the parliamentary pressure for the new rules, said the commission had come forward with regulation that was "so light, it's flyweight". He said: "Private equity can pop the champagne today but they may not be celebrating for long as we will not accept such an ineffective regulation."

Charlie McCreevy, EU commissioner, said the directive was necessary to address the concerns following the financial crisis.

He said: "There is now a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector. In particular, it is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight."

The directive proposes imposing "demanding regulatory standards" on all managers with funds over the value of €100m (£89m). The regulations will also extend to "all major sources of risks in the alternative investment value chain" including "key service providers ... depositaries and administrators". The directive says they will be "subject to robust regulatory standards".

The funds will also have to demonstrate standards of governance.

Florence Lombard, executive director of the Alternative Investment Management Association, said: "This directive is not a proportionate regulatory response to any of the identified causes of the current crisis."

She said that all of the major reports concluded that neither hedge funds nor private equity caused the crisis.

John Cridland, deputy director general of the CBI, said: "It is of deep concern to us, just a week after Alistair Darling said that we must have a business-led recovery, to push away the richest and most exciting investment professionals from this country towards others that want them more."